Small Cap Value Report (Tue 30 June 2020) - VNET, D4T4, SOLI, DRV, COG, STAF, WGB, TRAK, SYS1, TST

30th Jun '20 by Paul Scott

44 comments 9989 reads

Good morning, it's Paul here with the placeholder for Tuesday's SCVR, for you to leave your comments on the RNS from 7 am.

Please see the header for company results and trading updates that I'll be looking at today. Quite a lot, 10 companies, so it's doubtful I'll have time/energy to do any reader requests, sorry about that.

Estimated timing - I've started early at 7am, so there should be plenty of material up by official finish time of 1pm. I'll leave a note here if I need more time to cover everything, which is looking likely, due to lots of trading updates & results being published today.
Update at 13:00 - I've done 5 companies so far, and will add some more later this afternoon, after lunch.
Update at 17:40 - today's report is now finished.

Mello Virtual

David Stredder and his team have been busily working on an online version of the UK’s highest quality & friendliest investor show, Mello.

It’s on 10-11 July, so quite soon. Tickets are amazingly cheap, so I’ve already bought mine here. As usual, there will be some brilliant speakers, and decent quality companies giving presentations.

I’ll miss holding court in the bar afterwards, but never mind!

Company webinars

I must admit that I’m finding it wonderful to “attend” meetings online. Last week there was another really useful company webinar, from Warpaint (W7L). Thanks to Equity Development for arranging that. It gives a nice flavour for what management are like, and how they interact. W7L management made a good impression on me, with open/honest answers to the questions, and a good presentation. It doesn’t matter if there are minor technical glitches, as this stuff is all quite new at the moment.

If I find any webinar useful, then I'll publish a link here. Also, I encourage readers to post comments including links to useful webinars.

Here's the recording of the W7L webinar;

That's all I've got in pre-prepared stuff, as I used up most of it yesterday.

Vianet (LON:VNET)

Share price: 94.5p (up 8.6% today, at 08:52)
No. shares: 28.95m
Market cap: £27.4m

AGM Statement

Vianet Group plc (AIM: VNET), the international provider of actionable data and business insight through devices connected to its Internet of Things platform ("IOT")

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MiserableJacktPotato

30th Jun '20

Thanks, that's good to know. I'll stop worrying for now.

Albertos

Wirecard

I am always very surprised when I see (up to now here) allegations that auditors did not seek direct 3rd party confirmation with banks - some of which, from memory, prove to be correct.

Global accouuting governing bodies are, as far as I'm aware, as one on their Auditing Standards that a 3rd party confirmation is required for each and every bank account/loan. This is needed not just to prove the quantum of the cash or loan but also provides valuable confirmation of security, charges given and contingent liabilities.

When I was an auditor I spent several hours on the phone chasing up bank letters with banks/clients. Far more recently on the other side of the fence I had to spend quite a lot of time getting access to a small subsidiary's minuscule bank deposit account (both signatories left) to ensure the group's consolidated statements were not qualified - the auditor (large firm but not big 4) explained it was mandatory in his firm and a colleague was no longer allowed to run audits when he/she did not pursue on the grounds of materiallity (similar situation).

Phil

shanklin100

In terms of D4t4 Solutions (LON:D4T4), think this is pretty significant from today's results...

"In the short term there is a well-known consequence of transitioning from perpetual to recurring licence models in that revenues recognised in the year are lower, hence the reported revenues fell from £25.2m to £21.7m in the period. If the majority of new contracts had closed on a perpetual licence basis then there would have been significant top line revenue growth in the year.

Several large contracts that probably would have closed on the existing perpetual licence basis were deferred into 2020/21 as a result of multiple stakeholders in client and partner organisations needing to review and approve new recurring revenue based contractual terms."

Given the backdrop, I am sure we would all have been happy with significant top line growth... ...and this is despite perpetual deals sometimes being more difficult to get over the line.

Paul Scott

Great point, thanks for posting it.

jonthetourist

I believe moving to SaaS is like hiding profitability in plain sight. Hiding it from the impatient, who don't look behind the numbers, and want short-term growth.
If you believe in the product, and trust the management, the transition phase is a real investment opportunity. I went through it with Proactis a decade ago and it ten-bagged before over-reaching with an acquisition.
D4T4 is in a market sweet-spot with a best-in-class product, and it's growth disguised by moving to recurring revenues. It is one of my biggest holdings.

Jon

Terry Dickens

I have a question, if I may ask you learned Ladies and Gentlemen

I have just sold short a company called #BCPT BMO Commercial Property Trust. When I went to check the dividend payment, Stocko shows me that this company has been paying a dividend every month from 2012, can this be right? Divs are usually paid half-yearly or at the most Quartly. I have never seen a company paying divs monthly.

Please educate me.

What a monster report - good effort today Paul!

timarr

Stocko shows me that this company has been paying a dividend every month from 2012, can this be right?

Yep. Nothing inherently strange in this - if cashflow permits then a company can pay whatever dividends it wants. However BMO Commercial Property Trust (LON:BCPT) have suspended payments due to the current issues with collecting rents.

timarr

Thanks timarr you lean something every day

WDWombat

As Paul (I hope!) correctly points out one of the major advantages of the change should, over time, be a smoother revenue pattern. Severe changes in six month sales reported have not been helpful.

abtan

Solid State (LON:SOLI)

1 - CASH GENERATION

I no longer hold, but something to point out that worryingly wasn't mentioned today, but was in the last update:

"Net cash at 31 March 2020 stood at circa £3.0m as a result of continued strong cash generation and proactive cash management with clients and suppliers (2019: net debt £2.0m). Cash generation has also benefitted from a number of advanced payments totalling approximately £2.5m which will unwind across the course of the financial year ending 31 March 2021."

If one excludes this £2.5m advanced payment + working capital movements + debt repayments + dividends, the underlying cash flow was c.£2.4m.

A company worth £50m generating £2.4m of underlying cash a year seems overvalued to me, and I would only be interested if revenue and margins were on the up. Which leads me to...

2 - WEAK H2 MANUFACTURING PERFORMANCE

Manufacturing Revenue in H2 actually decreased Year-on-Year by -1.8%.

So the Full Year +8.8% looks great, but this was all driven by the +22% revenue growth in H1.

Note that the year end is March, so this H2 revenue drop should not be Covid-related.

I'm only half way through - just had lunch, a nap, and now about to have a coffee and add some more sections! :-)

No. That's where trust in management comes in. When they miss HY by a mile and say, don't worry we'll still hit the FY number, a lot of sceptics exited, understandably.

But it also meant their shares were available at half price for a while.

Gromley

I wrote a piece over at Cube a couple of weeks ago and also un-paused my Why I will be selling Walker Greenbank experiment over here.

I'm mostly pleased by today's update.

On the one hand my investment thesis is still intact and whilst we previously knew that they had been continuing to sell during the lockdown I had presumed this to be quite a minimal amount so to find out revenues for the first 5 months (3 & a bit of which were during lockdown) were 65% of last years is pleasing.

On the other hand whilst they report a "steadily improving trend" - sales still being down 31% over the last four weeks is weaker than I would have hoped.

This years numbers don't really matter so much as the exit rate and how quickly things get back to "normal". However I do like Paul's back of fag packet profitability calculation for the current year - but I do think it is overly pessimistic.

A 20% (£13.6m) reduction in Gross Profit is a reasonable guess based on what we know , but Operating costs will be down by much more than the £3-4m Paul suggests.

When I tested their ability to survive the lockdown one important point was that the "vast majority" of their staff were furloughed and all staff had agreed a temporary 20% pay cut.

The staff cost is close to £2.5m / month so three months of lockdown will have saved them at £6m I expect, plus the annualised cost efficiencies (£1m incremental I think) dropping through from last year and then other operating cost reductions (including marketing)

There will of course be some exceptional Covid expenses as well, but overall I expect they should turn a small profit this year (ending Jan-21). For the year ending Jan-22 there is no reason (at this stage) to assume earnings should not recover to at least an EPS of 8p - so at a forward PE of 5 and taking into account the quality of the business I think this looks very good value still.

We probably need to see news of sales picking up further though for the market to get to excited. The AGM is scheduled for the end of July so there will be further news then.

Hi Gromley,

That's really helpful, thanks. I had so many companies to cover today, that I could only spend a very brief time on my very crude forecast for WGB. Your logic on staff costs is very good, so it sounds like you're thinking in terms of around breakeven for the current year? I would be pleased with that.

Decorating should be something that people want to do more of, having been stuck indoors for 3 months.

Regards, Paul.

Thanks Paul,

I couldn't achieve the breadth of coverage you do - so I've cultivated a (rather long) watchlist on which I've already done some research, so I already had the staff costs figure at my fingertips.

Yes, I think around breakeven (maybe a small profit even). My main point is though that having remained solvent I think they should get back to "normal" relatively quickly - I was a holder at twice the price towards the end of last year.

As I said my main disappointment was that the YoY figures haven't recovered as much as I hoped - I understand a lot of DIY has gone on already in the last couple of months. One possible theory is that buyers of WGB products are more likely to "get someone in" than DIY and I don't think people have been too keen to have trades in their houses so far.

Walker Greenbank (LON:WGB) may or may not set the world on fire in the near term (they have always been "cheap") , but at the very least I think they are low risk.

Anyway thanks for the Mello prompt - it reminded me to book out Friday as well as the Saturday. I hope David has been creative in re-creating the evening "sessions" ;-0

Retireyoung

Great effort indeed. And thanks to everyone! I find the reports, comments and discussions on Stockopedia one of the most valuable elements of the site.

jonno

1st Jul '20

Nice addendum Gromley, I hold and have added recently, albeit still down on my original purchase price. My reasoning being that the company will survive and the share price significantly discounts the value of the brands. However I am somewhat surprised and bemused by the insignificant holdings of the management team. This together with the pension deficit were the main counter arguments to buying.

All the best

See the RNS - the Directors must have been reading your post.

carmensfella

6th Jul '20

For those looking to attend MelloVirtual and wanting to see which companies are coming then here is a list with about six still to be added...

https://melloevents.com/mellovirtual-event-exhibitors/

The programme schedule should go live tonight and you will be able to buy one of the 60 or so remaining tickets here...

https://melloevents.com

Small Cap Value Report (Tue 30 June 2020) - VNET, D4T4, SOLI, DRV, COG, STAF, WGB, TRAK, SYS1, TST

Mello Virtual

Company webinars

Vianet (LON:VNET)

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Paul Scott

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